Importance of Cash Flow Forecasting

Cash is king!

It’s the classic business line that EVERYBODY quotes every time somebody mentions profits. Cash is the bloodline of the business and if cash flow stops, it kills the business – and it does it fast, even if they are profitable! So whatever is associated with cash flow is crucial for any business and that stands true for cash flow forecasting.

What is cash flow forecasting?

Forecasting is a decision-making tool used by many businesses to help in budgeting, planning, and estimating future growth. In the simplest terms, forecasting is the attempt to predict future outcomes based on past events and management insight.

Importance of Cash Flow Forecasting

Cash flow forecasting is important for a business when it comes to future planning and potential of the business. It helps to review cash income before it stops to help prevent business insecurities. Thus, it is imperative that management forecasts what is going to happen to cash flow to make sure the business has enough cash to stay afloat.

Another benefit of cash flow forecasting is to help your business predict any shortfalls in cash balances in advance, it works as a great warning system. Additionally, a good forecast will show if you can afford to pay your suppliers, employees and outstanding invoices. Basically, cash flow forecast will help your business spot any problems with customer payments, outstanding invoices and so on. It also helps any of your stakeholders and investors as they often require a regular forecast to ensure your business will continue.

How often should you run a cash flow forecast?

As you can see financial forecasts are really important for a business, especially when you are strapped for cash. In these situations, you should try running a forecast daily. This way you can ensure that every single detail is accounted for and nothing goes unnoticed. Generally, a financial forecast should be as comprehensive as you can make it, so you should try and remember to include all your sales, costs and cash transactions and in a cash deficit, you should account for everything.

If your business is much more stable, then a standard cash flow forecasting period is a calendar month.

How far should you forecast?

It depends how far ahead of time you want to forecast, but keep in mind accuracy of a forecast will degenerate over time, so if you are running a forecast over 10 years and don’t account for every eventuality, it will probably be unrealistic. A good timeframe for a cash flow forecast is between 1 and 3 years. Even then, where possible run multiple scenarios and try to account for various eventualities, as they will affect your business.

If you are interested in taking your cash flow forecasting to the next level, look into using a forecasting software that will save you a ton of time and effort